This dissertation consists of three essays on financial and institutional determinants of entrepreneurship and the importance of management style.
Chapter 1: Direct and Indirect Effects of Cash Transfers on Entrepreneurship
In this chapter, I exploit a liquidity shock from a large-scale welfare program in Brazil to investigate the importance of credit constraints and informal financial assistance in explaining entrepreneurship. Previous research focuses exclusively on how liquidity shocks change recipients’ behavior through direct effects on reducing financial constraints. However, the shock may also produce spillovers from recipients to others through private transfers and thereby indirectly affect decisions to be an entrepreneur. This essay presents a method for decomposing the liquidity shock into direct effects associated with relieving financial constraints, and indirect effects associated with spillovers to other individuals. Results suggest that the program, which assists 20 percent of Brazilian households, has increased the number of small entrepreneurs by 10 percent. However, this increase is almost entirely driven by the indirect effect, which is related to an increase in private transfers among poor households. Thus the creation of small businesses seems to be more responsive to the opportunity cost of mutual assistance between households than to financial constraints.
Chapter 2: Bankruptcy Law and the Creation of Small Business
This essay investigates the relationship between bankruptcy law and the creation of small businesses by using the 2005 reform in the U.S. as a natural experiment. In theory, a pro-debtor law provides an insurance against business failure and thereby encourages entrepreneurial investments. On the other hand, a pro-creditor law inhibits debtor’s abusive behavior, improving the selection of projects. The 2005 reform was intended to reduce the number of abusive filings and can be viewed as a shock that has affected each state in a different way, depending on their own codes. Although changes in state codes are often related to economic conditions, this reform was not triggered by any state in particular. The reform has actually lessened debtor’s protection yielded by state codes. Based on the previous state laws, I can identify households that were more and less affected by the reform. Results show that the pro-creditor reform reduced the probability of individuals starting their own business and also reduced the gains of less profitable firms. These findings suggest that pro-debtor codes, as in place before, might work as insurance for small business owners.
Chapter 3: Contrasts in Styles and Managers Impact on Corporate Policy
This essay proposes a new approach to study how corporate policies change upon the replacement of the CEO. We employ corrected simultaneous tests (not subjected to the criticism attributed to the F-test) on the CEO fixed effects and find a significant heterogeneity among their styles. Furthermore, we implement a measure that explores the differences in style between the exiting CEO and the incoming CEO. This method not only show that policies change around a turnover, but also allows us to estimate how fast the firm policy converges to the new equilibrium. For the most part, our results are not significantly different if we consider exogenous exits (e.g. death, illness, and natural retirements). Thus, the relation between CEOs and subsequent corporate policy is not driven by the characteristics of the exiting CEO, but is instead determined largely by the contrasts between characteristics of the new and the former CEO.